Financial Accounting Summary PDF

**Financial Accounting 1** **Accounting** is giving information about performance and position. **Position** is the value of the business and its assets. **Performance** is the profit a business makes. The **objectives** of accounting are recording, planning, management decisions, performance measu...

**Financial Accounting 1** **Accounting** is giving information about performance and position. **Position** is the value of the business and its assets. **Performance** is the profit a business makes. The **objectives** of accounting are recording, planning, management decisions, performance measurement, position analysis, liquidity assessment, financing, internal control accountability, legal compliance and informing users. The **internal users** of accounting are owners, managers and employees. The **external users** of accounting are investors, lenders, suppliers, customers, tax authorities, the government, auditors and the public. There is a difference between financial and managerial accounting. **Financial accounting** is focussed on information for external users and mainly consists of a balance sheet and income statement. **Managerial accounting** is focussed on information for internal users and has detailed information per department to help with decision making. **Accounting responsibility** decreases the chances of fraud by making sure the accounts are managed correctly. Accountability means keeping people accountable and responsible. **USALI** (Uniformed Systems of Accounts for the Lodging Industry) enables accountability, because USALI statements are easy to compare and it holds companies to a specific standard. The **average check** is the average spent amount per customers. The formula for the average check is "total amount spent/amount of customers". **Bookkeeping** is the part of accounting that involves business transactions, analysing, recording and updating accounts. **Revenue** is everything the business has sold. A different word for revenue is sales. **Sales** are recorded in a sales account. Revenue can be described as the amount of economic value created for the customer. **Room sales** is the revenue generated by selling rooms, **food sales** is the revenue generated by selling food and **beverage sales** is the revenue generated by selling drinks. **Expenses** are the assets needed to generate revenue and they are controlled by managers. Expenses can be described as the amount of economic value consumed by the company. Wages are the easiest to control as a manager. To **incur** means to make an expense. A business sells services and/or goods with the main purpose of making a profit**. Profit** is "sales -- expenses". Profit is not money, it is a **result** or performance of business and belongs to the owners. It is the managers' main task to maximize the profit a business makes, however, profit is supposed to be made in a responsible and sustainable way. **Sustainability** means to reduce waste. **Suppliers** are companies that a business buys goods or services from. **Assets** are everything a business owns. **Liabilities** are everything a business owes to others. **Creditors** are businesses we owe money to and they therefore fall under liabilities. Because a business owes creditors, the creditors have a claim on the assets of a business. **Buying on account** means that we receive goods/services now and pay for them later. This also a part of liabilities, under **accounts payable**. **\ ** **Financial Accounting 2** A **business transaction** happens when a company sells a good or service in exchange for money or the promise to pay. The **promise to pay** means that a customer will receive the goods/services now and pay later. This increases the asset **accounts receivable**. Every business transaction affects at least 2 bookkeeping accounts: the cash account (or accounts receivable in case of a promise to pay) and sales account. The **cash account** is an asset. The **sales account** is a revenue account. The 5 **bookkeeping accounts** are **assets**, **liabilities**, **owners' equity**, **revenue** and **expenses**. **Owners'/stockholders' equity** represents the owners' claim in a company, the same way liabilities represent the claims of others (e.g. creditors) in a company. The **accounting equation** states: assets = liabilities + owners' equity. The revenue and expense accounts are represented in owners' equity through retained earnings. **Retained earnings** for a year consists of revenue -- expenses -- dividends. At the end of every financial year the retained earnings are added to the existing retained earnings in owners' equity. Retained earnings can be described as a company's lifetime earnings not distributed as dividends. **Net income** is the increase in net assets during a financial year. Net income is the same as profit. It can be described as an estimated amount of economic value created by a company in doing business. When revenue increases, profit increases, which results in an increase in owners' equity. When expenses increase, profit decreases and as a result of that owners' equity decreases as well. **Fixed assets** are bought for a long time (more than a year) and are not for sale. This includes land, building, furniture, equipment, China, glassware, silverware and linen. **Depreciation** is the loss of value of fixed assets over time due to usage. **Stocks/shares** are in the hands of stockholders/shareholders. By owning stock a person owns part of a company. **Preferred stock** is usually more expensive than common stock, because preferred stock gives the stockholder more rights than a stockholder with common stock. The rights differ per business, for example, more dividends, a higher opinion or a higher pay out in case of bankruptcy. **Dividends** are a distribution of profit to stockholders as a reward for their investment in the company. These profits are usually distributed per share. First the dividends must be **declared** (promised/announced). This will decrease retained earnings and therefore owners' equity. At the same time **dividends payable** (a liability) goes up. Then the dividends are paid, making dividends payable and cash go down. **Financial Accounting 3** **Solvency** is a company's ability to pay debts on time. A **balance sheet** is a statement that shows a company's financial position at one specific moment in time. The **income statement** is a financial statement that contains the revenue and expenses from a specific period of time, usually a financial year. A **statement of cash flows** (SCF) shows how much cash has been used and received by a company during a specific time. **Cash flows** show the changes in the cash accounts and are therefore objective and precise. **Accrual accounting** is the difference between the cash flows and net income and its purpose is to match revenue and expenses to the time period during which they were incurred, as opposed to the timing of the cash flows related to them. This means recording revenue on the day it was made, not the day the payments are received. **Profitability** is a company's ability to generate net income. There are four **accounting assumptions** that are used in all financial statements. The **monetary unit assumption** states that only transaction data with monetary value will appear in the accounting records. The **economic entity assumption** means that the activity of the entity (company) is separate from the owners. The **time period assumption** states that the economic life of a business can be divided into artificial time periods. The **going concern assumption** means that it is assumed that a company will continue to operate in the future. **Accounting principles** are standardized rules and guidelines for financial data. These standards increase the quality of financial statements. **International Financial Reporting Standards** (IFRS) is the most widely used set of accounting principles. The **International Accounting Standards Board** (IASB) issues the IFRS. **Generally Accepted Accounting Principles** (GAAP) is a set of accounting principles widely used in the US. There are four accounting principles. **Revenue recognition** means that revenue should be accounted at the point of transaction (point of sale). The **matching principle** states that expenses should be matched to the revenue that they are used for. The **full disclosure principle** means that companies should disclose information that might make a difference to external users. The **cost principle** states that assets must be dictated at cost - accumulated depreciation. The cost principle is **reliable**, because it is factual and measurable and **relevant**, because it shows that assets are sacrificed for revenue. Depreciation means to allocate the cost of an asset over its useful life (the amount of time you can use an asset). **Accumulated depreciation** is the total depreciation an asset has been allocated so far. Accumulated depreciation is a **contra-asset** and is usually shown on the balance sheet. Fixed assets have a cost (what price they were bought for) and the cost is then lowered with accumulated depreciation. A **chart of accounts** is a table of contents for all accounts in a company. **Maturities** are the dates for a final payment on a loan. **Accrued interest receivable** is interest earned on interest-bearing assets that the business has not received yet. **Accrued expenses** are expenses that are made but not yet paid. This includes **accrued payroll**. **Securities** are stocks and bonds. **Marketable securities** are short-term investments that are readily convertible to cash. **Operating expenses** are expensed immediately and are used for the operation of a business. **Expired costs** are operating expenses that are paid at the moment of incurring. **Unexpired costs** are prepaid expenses and appear as assets, because a company 'owns' the right to make those expenses later. For example, **prepaid rent** is an asset, because the company paid for rent but has not 'received' the use of the building for that time period yet. **Financial Accounting 4** **Balance sheet accounts** are assets, liabilities and equity. A balance sheet in **account format** has two columns: one with assets and one with liabilities and equity with the same total at the bottom. A balance sheet in **report format** has assets on the top, followed by liabilities, followed by equity. **Total claims** are the claims of creditors (liabilities) and claims of owners (equity). The **principle of conservatism** states that assets should be shown at their current (market) value or less to ensure that the asset total is not too high. **Current assets** are assets that will be used in the short-term (less than a year). This includes inventories. The most current asset is cash. **Noncurrent assets** are fixed assets for the long-term (more than a year). **Other assets** are **intangible assets** like rights, privileges and trademarks. For example, a patent that increases a company's value. A patent is usually valid for a set amount of time, which means it will be worth nothing after the time period. Therefore, intangible assets can depreciate. This is called **amortization**. **Goodwill** is extra market value that a company has due to, for example, reputation or a solid customer base. Because this creates value it appears as an asset on the balance sheet. A **security deposit** is an asset, because the company has paid it but will get it back after a period of time. Therefore, it is money that a company will receive later. An **advance deposit** is a deposit that customers use to guarantee their room or other booking. This is a liability, because it is money that the company has received, but they still have to deliver the service. Therefore, they owe the customer a service. A **restricted cash fund** is used to compensate the balances on a balance sheet or for a special purpose. **Allowance for doubtful accounts** is an estimate of uncollectable receivables. This means that it factors in the fact that some promises to pay will not actually come through. This is an asset. A **permanent difference** is revenues or expenses that are on the income statement, but not on the income tax returns. A **timing difference** is revenues or expenses that differ from the statements for a while, but they will eventually match. A **hybrid liability** is partly a current liability and partly a noncurrent liability. The **current part** of the liability is the part that must be paid within a year. The remainder of the liability is long-term and therefore **noncurrent**. **Par value** is the value of one share. To issue stock at par value means that the stock is sold by the company for the value of a share. This increases the equity account **common stock issued**, which consists of the total par value of all shares issued by a company. **Additional paid-in capital** is generated when shares are sold for more than par value. The additional money that is received for the share is added to the additional paid-in capital, instead of common stock issued, and increases the owners' equity. **No-par with stated value** means that the company issues shares for more than the par value, but all of the money received for the shares is considered common stock issued and there is no additional paid-in capital, no matter the price of the shares. **No-par without stated value** means that shares are issued without a set price. Instead of a set price, the market decides the value of the shares and all proceeds are common stock issued. **Callable stock** means that the corporation can buy back (call) stock from stockholders. This is usually done to keep control of the company, because being a stockholder with a lot of stock gives someone a lot of say in a company. **Treasury stock**, or **non-issued stock**, is the stock owned by the company itself. Treasury stock increases when a company buys back callable stock and decreases when stock is issued. **Assets** and **expenses** increase with debits and decrease with credits. **Liabilities**, **equity** and **revenue** decrease with credits and increase with debits. **Debit** **Account** **Credit** ----------- ------------- ------------ Increase Assets Decrease Decrease Liability Increase Decrease Equity Increase Decrease Revenue Increase Increase Expenses Decrease A **journal** is a chronological listing of business transactions in debits and credits. Journalizing has the following steps: 1\. Identify the accounts involved in the transaction 2\. Do the accounts increase or decrease? 3\. Identify the account types 4\. Is this debit or credit? In the journal, the debit part should be listed first, followed by the credit part. The debit and credit must be the same amount in every transaction. **Posting** means sorting the debits and credits from journal entries and copying them into individual accounts in the ledger. The **ledger** is a collection of all the accounts a company has and it shows the changes per account. A **T-account** is an account in the shape of a T with debits on the left and credits on the right \> A **trial balance** is a listing of all the ledger accounts and their balances. A trial balance has all five account types and provides the raw material for the income statement and balance sheet. A trial balance is an internal document and not viewed by external users. **Financial Accounting 5** **Depreciation** allocates the cost of an asset, which relates to the matching principle, because the cost of an asset is matched to the time it can be used to generate revenue. Depreciation is always an **estimate**. The formula to calculate depreciation is (asset cost -- salvage value)/useful life. The **salvage value**, or disposal value, is the value an asset might have left over after the useful life. The asset cost -- salvage value is called the **depreciable cost**. In the ledger depreciation is listed as: \- Depreciation expense on vehicle (expense) €10.000 (debit) \- Accumulated depreciation on vehicle (contra-asset) €10.000 (credit) Make sure to add, for example, "on vehicle" or "on building" to both accounts in the business transaction. The **straight-line method** for depreciation means that the same amount is depreciated each year, calculated with the formula stated above. The **units-of-activity method** means that depreciation is calculated according to the amount of usage of the asset. **Accelerated depreciation methods** give more depreciation costs in the early years and less in the later years of the useful life. Examples of this are the double-declining balance and sum-of-the-years'-digits. Depreciation is a **noncash expense**, because it is not paid for with money. It is only shown on the balance sheet and income statement. The asset is paid for with cash when it is bought, but only becomes an expense over the years. The **book value**, or carrying value, is the value that an asset has according to the balance sheet. The formula for book value is asset cost -- accumulated depreciation. **Adjusting entries** are used to adjust the depreciation accounts in the journal at the end of a financial period. If the depreciation changes drastically, for example due to a shortened useful life, it will be adjusted in current and future statements, but not in past statements. The amount that still has to be depreciated is then divided over the years still left over of the useful life. **Temporary accounts** are the income statement accounts (revenue and expenses) that close into the equity account at the end of a financial year. The income statement accounts are used to make a **retained earnings statement** to use for the equity account and then they are brought back to zero for the new financial year. The retained earnings statement is a financial statement that computes the profits that are not (yet) declared as dividends to add this to the owners' equity. **Financial Accounting 6** **Annual financial statements** are made at the end of a **fiscal year**, which is usually from January 1^st^ to December 31^st^. **Interim financial statements** are issued during the fiscal year, on top of the annual statements. The four main financial statements are the income statement, statement of retained earnings, balance sheet and cash flow statement. The **net income statement** shows revenue, expenses and the resulting net income. This is the result of operations and therefore sometimes called the **operating statement**. If the expenses exceed the revenue, there will be a **net loss** instead of net income. A loss is usually given in **brackets** like (10.000) for a 10.000 loss. An income statement is build up like this: Revenue ---------------------------------------------- ----------------------------------------------------------------- Gross profit = revenue -- cost of sales Income before fixed charges and income taxes = gross profit -- operating expenses Income before income taxes = income before fixed charges and income taxes -- fixed charges Net income = income before income taxes -- income taxes The **equity statement** shows the amounts with which owners' equity goes up and down. The **cost of sales** is the purchase cost of the goods that a company sells. **Gross profit** is calculated with revenue -- cost of sales and is sometimes called the **gross margin**. The gross profit must cover operating expenses in order to create net income. **Operating expenses** are expenses most directly influenced by management efficiency. Some common operating expenses are salaries and wages, employee benefits, China, glassware and silverware, kitchen fuel and operating supplies. **Salaries and wages** are expenses that include overtime, vacation pay and bonusses. **Employee benefits** are a separate expense that includes employee meals, social security, healthcare, premiums and insurance. Employee meals do not have a cost of food sales. The cost is part of the operating expenses. **China, glassware and silverware** is both an asset and an expense. The asset of China, glassware and silverware is on the balance sheet and contains the value that the company has in stock. The expense China, glassware and silverware is incurred due to plates and glasses breaking. **Linen and uniforms** depreciate and this depreciation is determined during periodic checks of all the linen and uniforms. **Kitchen fuel** is an expense that includes gas, coals and electricity for the kitchen. **Operating supplies** are supplies used for basic operations like cleaning and bar supplies. Other operating expenses are **advertising**, **utilities** and **repairs and maintenance**. **Income before fixed charges and income taxes** measures the operations and management efficiency. **Fixed charges** are expenses that cannot be controlled by management, for example, rent, insurance, property taxes, interest and depreciation. Fixed charges are not the same as fixed costs. **Fixed costs** are expenses that are incurred regardless of operations or revenue and can sometimes be controlled by management. **Income taxes** are federal taxes on income made in the company. Income taxes usually have a specified **minimum payment**, an extra tax for corporate equity and a tax on **taxable (net) income**. **Sales** are the largest revenue classification. **Other revenue** comes from interest income (providing a loan to others and collecting the interest) and dividends income (when a company has shares in a different company). **Tips** given to servers are not a part of the revenue. Tips are collected, but not recorded as revenue and later paid out to the servers. **Sales taxes**, sometimes called **VAT** (Value Added Tax), are not part of the revenue, they are collected, accounted for and later paid to the government. **Input VAT** is sales taxes paid to a supplier and the supplier then pays it to the government. **Output VAT** is sales taxes received from customers. The **VAT payable** (sales taxes that are owed but not yet paid to the government) is calculated with output VAT -- input VAT. The **perpetual inventory system** is constantly updated and inventory status is immediately available. This gives a lot of control, because the amounts logged into the system and the actual stock is easy to verify. The **periodic inventory system** is kept by conducting physical inventory counts on a scheduled basis to determine the inventory status. **Residual value**, **salvage value** or **scrap value** is the value an asset has left at the end of the useful life. **Demolition expenses** are costs for removal of an asset when it is no longer used. Demolition expenses do not make the scrap value negative. A **building** depreciates over time and needs to be renovated every once in a while to revive the value. However, **real estate** does not lose value over time, because the value is decided by the market and real estate prices, generally, only go up. **Financial Accounting 7** **Internal control** means keeping control of a business and its assets. Internal control prevents theft and inefficiency, but it does not remove the threat entirely. **Administrative controls** promote efficiency and come from the organization's structure. **Accounting controls** safeguard and maintain assets and accounting records. The **owner** is a powerful internal control tool, because an owner has power. **Cash** is very susceptible to embezzlement and theft, because it is in demand and relatively easy to steal and hide. **Safeguarding assets** means to prevent theft, maintain fixed assets and avoid spoiled inventory. **Promoting efficient operations** is done with recruitment, training and technological advances. **Accurate and reliable accounting** is done with established procedures and results in reliable reports for external users and informed operational decision making. **Promoting the pursuit of business policies** means following procedures, training staff and installing video cameras. **Internal control principles**: \- **Establishing clear lines of responsibility** means to put one person in charge of each task. \- **Segregating duty** means segregating responsibility so that multiple people oversee a transaction. This means separating record keeping and custodianship to make sure people check each other. \- **Preparing written procedures** makes sure that deliveries can be verified and checked. \- **Documenting procedures** means determining transactions and pre-numbering bills to determine missing bills and cash. \- **Restricting asset access** limits employee access and minimizes risk, but it should not ruin efficiency. \- **Using mechanical or electronic devices** like vaults, cash registers, access swipe cards, barcode scanners, sale sensors and clocking systems ensures that everything happens more accurately than humans can achieve and registers everything to check and verify easily. \- **Maintaining adequate insurance** protects assets against loss, theft or damage. \- **Conducting internal audits** means that auditors investigate record keeping, systems and procedures and they compare cost of sales to inventory to be able to discover theft. \- **Computer programming controls** limit unauthorized interference and ensures that debits equal credits. \- **Physical controls** are vaults for cash, employee id cards and storage doors with locks. \- **Job rotation** means rotating employees to different jobs to increase chances of catching dishonesty, gives less opportunity for collusion to employees and creates task variability with employees. **Internal control for specific hotel activities**: \- **Cash** is easy to steal and desirable. Duties involving cash should be segregated and cash should be registered immediately. \- **Purchases** should be authorised with four forms: purchase requisition form (description), purchase order form (actual order), receiving report form (receipt for shipping) and suppliers invoice (financial records of purchase). \- **Inventory** is best protected with a perpetual inventory system instead of a periodic inventory system, because everything is registered with the perpetual system. \- **Payroll** is the largest hotel expense and hours worked should be verified. Signing and mailing checks with salaries and wages should be verified as well. An **analysis for adjustment** is made before making financial statements. The first step is checking **unrecorded receivables**. The second step is checking **unrecorded liabilities**. The third step is adding or deducting **prepaid expenses** that are used or paid. The forth step is recording **unearned revenue** that is received before the actual moment of transaction and falls under liabilities. **Adjusting entries** are journal entries for adjustments and are required at the end of each accounting period. These entries involve at least one balance sheet and one income statement account. **Adjustments** are made to adhere to the matching principle and revenue recognition principle. For the balance sheet the accuracy of assets and liabilities should be determined and changed where necessary. For the income statement the accuracy of revenue and expenses should be determined. There is nothing that appears in both the income statement and balance sheet. The **journal** contains the business transactions and the **ledger** contains the balance of all accounts. A **trial balance** has all of the ledger accounts and their balances. The order on the trial balance is asset accounts \> liability accounts \> equity accounts \> revenue accounts \> expense accounts. The **post-adjustment trial balance** is a 'summary' of the financial year and proves that debits equal credits. **Depreciation**, **amortisation**, **prepaid expenses** and **inventory checks** are classic examples of adjustments. **Financial Accounting 8** A **financial ratio analysis**, or **financial statement analysis**, shows the relationships between statement numbers and trends over time. **Diagnostic** means identifying the problem and **prognostic** means predicting performance. The **DuPont framework** is a framework for ratio analysis based on the **Return on Equity** (RoE) components: profitability, efficiency and leverage. **RoE** is calculated with net income/owners' equity and measures how much profit is generated with the investments from the owners. **Profitability** is measured with the **Profit Margin** (**PM**), calculated with net income/revenue, to measure how much profit there is compared to revenue. **Efficiency** is measured with **Asset Turnover** (**AT**), calculated with revenue/total assets, to measure how efficient a business is using assets to generate revenue. **Leverage** is measured with the **Asset-Equity ratio** (**AE**), calculated with total assets/owners' equity, to measure the amount of money borrowed to purchase assets. **Benefits** of high leverage are that more assets generate more revenue and therefore more profit. However, there is a higher risk, because loans come with interest costs that cannot be changed. According to the DuPont framework, RoE = PM x AT x AE The **current ratio** measures the liquidity of a business, which means the ability to pay obligations on a short term. This is calculated with current assets/current liabilities and should be slightly below 2. The **debt ratio** measure the amount of liabilities compared to equity a company has. This is calculated with total liabilities/total assets. The **average owners' equity** is the average of owners' equity throughout a year. This is calculated with (equity beginning of the year + equity end of the year)/2. This is the owners' equity that is used for ratio calculations. For **assets** and **liabilities** in ratios, the average should be used as well. A **horizontal analysis** means comparing ratios to ratios of other time periods. A **competition comparison** means comparing ratios to the ratios of other (similar) companies. It is good to know 'normal' sector ratios for the industry. **Trends** are yearly information and they show whether the company is on the right track. **Comparative data** is data that you can actually compare to each other. This is hindered by scale, size and numbers. The solution to make data comparable is to divide it by a specific scale. **Common size financial statements** have numbers divided by total sales (the specific scale in this case) to allow for comparison. A **common size balance sheet** is made with 'item' on the balance sheet/total assets. The **relative value** is given in percentages and used for common sized financial statements. The **absolute value** is in euros/dollars. **Financial Accounting 9** **Net assets** are assets -- liabilities. A **balance sheet total** is not equal to the market value of a company, because it shows assets at their historical cost and reputation of a company is not recognized in the balance sheet. **Unreported intangible assets** are service, reputation, branding, technology and added value that makes a company's market value higher. The **accounting book value of owners' equity** is on average 30% of the market value of a company. A **limitation** of the balance sheet is the instability of the dollar/euro, because it makes comparison less meaningful. Another **limitation** of the balance sheet is the fact that companies do not classify and report in a similar way. A third **limitation** is that some of the company's resources and obligations are not reported in the balance sheet at all. **Benchmarking** is comparing a company to competitors. **Budgets** compare the plans to the actual results. **Managerial Accounting 1** **Uniform systems of accounts** are standardized accounting systems that allow for comparison. **USALI** (Uniform System of Accounts for the Lodging Industry) is one of those standardized accounting systems made specifically for hotels. **Responsibility accounting** means making separate income statements per department to see which department is responsible for specific revenue and expenses. These income statements per department are also called **schedules**. USALI allows for responsibility accounting, because there are accounting systems for all of the departments. **Financing costs** are the interest costs for liabilities. [A USALI income statement has this layout]: Revenues \- Direct operating expenses = Total operated departments/departmental operating income \- Undistributed expenses = Gross operating profit \- Overhead expenses \- Financing costs and income taxes = Net income The **five levels of profit** in a USALI income statement are total operated departments, gross operating profit, EBITDA, income before income taxes and net income. **Direct operating expenses** are the cost of goods sold, direct labour expenses and direct supplies used. **Gross operating profit** (GOP) is calculated with departmental profit -- undistributed expenses. The GOP is used to measure **management performance**, because all of the expenses below the GOP are due to decisions made by owners. **Overhead expenses** are **non-operating expenses**, or **capacity costs**, that are incurred regardless of the level of activity. **EBITDA** (Earnings Before Interest, Taxes, Depreciation and Amortization) is a level of profit. An **operating statement** is an income statement without interest, taxes, depreciation and amortization. **Net revenue** is revenue -- allowances. **Allowances** are, for example, room reductions or other 'serviceable' reductions of rates. **Cost of sales** with the periodic system is calculated with beginning period inventory value + purchases (= goods available) -- ending period inventory value (= cost of goods used) -- goods used internally = cost of goods sold. **Inventory purchases** are the cost of goods with the cost of shipping. **Labour costs** are salaries + expenses salaries non-revenue departments + benefits (for example, employee meals). **Other expenses** are cleaning supplies, gifts, laundry and guest transportation. **Undistributed operating expenses** are administrative and general expenses, information and telecommunication systems, sales and marketing, property operation and maintenance and utilities. **Franchise fees** are fees that a franchise pays to the company for the use of the name and branding. These fees are reported under sales and marketing expenses. **Management fees** are the costs of an independent management company and often calculated as a percentage of sales or GOP. These fees are reported below the GOP, because the expense is incurred due to a decision made by owners. **Rent** includes the rent of major items that would have been fixed assets if purchased. A **gain or loss on the sale of a fixed asset** occurs when the depreciation was inaccurately estimated. The gain or loss is put on the income statement. **Supplementary schedules** are departmental schedules with detailed information for the department manager. **Managerial Accounting 2** The **operating efficiency ratio** measures management performance and is calculated with GOP/total revenue, excluding income taxes. The **paid occupancy percentage** is the percentage of rooms sold in relation to prrooms available for sale. This is calculated with number of rooms sold/number of rooms available. **Seat turnover** is the amount of times a seat is used during a period of time and calculated with number of guests served/number of seat available. **Complimentary occupancy** is how many rooms are used for promotion and calculated with complimentary rooms/rooms available. **Average occupancy per room** is how many people stay in one room and calculated with number of guests/number of rooms occupied. **Multiple occupancy** is the amount of rooms occupied by 2 guests or more and calculated with rooms occupied by 2+ guests/rooms occupied. The **sales mix** is the percentage of total revenue that an operated department generates and calculated with departmental revenue/total revenue. The **average daily rate** (**ADR**), or **average room rate** (**ARR**), is the average price of a room and calculated with room revenue/rooms sold. The **revenue per available room** (**REVPAR**) is how much revenue is generated per room (whether the room was sold or not) and calculated with room revenue/rooms available or paid occupancy percentage x ADR. The **gross operating profit per available room** (**GOPAR**) measures managements ability to produce profit and calculated with GOP/rooms available. The **average check** is calculated with total (food) revenue/number of food covers (covers = guests). Restaurant -\> 50 seats Today Revenue: €1000 From the 50 seats, 40 of them, were covered. SO 40 GUESTS The **food cost percentage** is how much the cost of food sales was in relation to the food revenue and calculated with cost of food sales/food sales. This is the same for the **beverage cost percentage**. The **labour cost percentage** is the amount of labour costs in relation to revenue and calculated with total labour costs/total revenue. **Managerial Accounting 3** **Costs** or **expenses** are the reduction of an asset for the purpose of increasing revenues. Types of expenses are fixed, variable, step and mixed costs. **Fixed costs**, or **total fixed costs** (**TFC**), remain constant, at least on the short term, regardless of sales. This includes salaries, rent and insurance. These costs do change on the long term, because they have to be raised to match inflation and demand. However, it can be assumed that fixed costs remain constant during the financial period. **Avoidable costs** are fixed costs that are avoided when a company shuts down for part of the year. For example, hotels that close during the off season can shut off utilities or stop paying seasonal employees. **Capacity fixed costs** relate to the ability to provide goods/services and capacity (for example, assets) necessary to do so, like depreciation and property tax. **Discretionary fixed costs** do not affect the capacity and can be avoided on the short term, however avoiding these on the long term causes problems. This includes staff training costs or advertising. **Fixed costs per unit sold** can be calculated with total fixed costs/units sold to achieve the average fixed cost per product or service. **Variable costs** change proportionally with the amount of units sold. This includes cost of food sales. **Total variable costs** (**TVC**) are calculated with variable cost per unit x number of units sold. **Step costs** are costs that are constant within a certain range of activity, but different for different ranges of activity. For example, one housekeeper is able to clean 10 rooms per day. If 30 rooms have to be cleaned, the cost is the cost of 3 housekeepers, which is a constant salary expense. If 31 rooms are sold, the cost increases to 4 housekeepers, which means a higher, but still constant, salary expense. For analytical purposes, step costs are often considered fixed within an average range. **Mixed costs** are partly fixed and partly variable. The cost is determined independently of sales, but varies proportionally with sales volume. This includes repair and maintenance, because repair is always necessary and therefore partly fixed, but during the high season more repair will be necessary than usual and therefore the costs can be higher as well. **Total mixed costs** (**TMC**) are fixed part of the cost + (variable part of the cost per unit x units sold). Mixed costs can be separated with the **high/low two-point method**. **1**. Select the highest and lowest period. **2**. Calculate the differences in activity (units sold) and TMC. **3**. Divide the difference in costs by the difference in activity to get the variable costs per unit. **4**. Variable costs per unit x activity in lowest period is total variable costs for the lowest period. **5**. Total cost lowest period -- variable cost lowest period = fixed costs. **6**. Repeat 4 and 5 for the highest period and if they are (nearly) the same that is the established fixed part and the rest is variable. Another method for separating mixed costs is a **scatter diagram**. **1**. Prepare a graph with sales/volume/activity on the horizontal line (x-axis) and euros on the vertical line (y-axis). **2**. Put the data of the periods in the graph with dots. **3**. Draw a straight (diagonal) line through the dots with an equal amount of dots above and below the line. **4**. The intersection with the y-axis is the fixed part, because at that point sales are 0. **5**. The fixed part x amount of periods gives TFC. 6. TMC -- TFC = TVC. 7. TVC/units sold = variable costs per unit. A third method for separating mixed costs is a **regression analysis**. This is the mathematical and precise approach to the data. This is done by adding the data to a program and letting the computer calculate the fixed and variable parts. **Total costs** (**TC**) are (fixed costs + fixed part of mixed costs) + (variable cost per unit including variable part of mixed cost per unit x units sold). To make this easier you can change this formula to TFC + TVC with the mixed costs separated and included in the TFC and TVC. The formula for TC is: [Y = a + bx] **Y** = total costs (value of dependent variable) **a** = total fixed costs (constant term) **b** = variable cost per unit (slope of the line) **x** = units sold (value of independent variable) **Managerial Accounting 4** **Cost-volume-profit analysis** (**CVP**) is set of analytical tools to determine the costs and volume needed for required revenue or break-even. It expresses the relationships between various costs, sales volume and profit. **CVP assumptions** are that fixed costs remain fixed during the period, variable costs are linear with revenue, revenue is linear with volume, mixed costs can be divided into fixed and variable costs, costs can be assigned to individual operated departments and qualitative factors are not considered. **Break-even point** is the point where total costs and total revenue are the same and net income is 0. The **CVP equation** is sx -- vx -- F = In. **In** is **net income**, at break-even this is 0. **S** is the **selling price** and uses the formula s = ((F + In)/x) + v. **X** is the amount of **units sold** and uses the formula x = (F + In)/(s -- v). **V** is the **variable costs per unit** and uses the formula v = s -- ((F + In)/x). **F** is **fixed costs** and uses the formula F = sx -- vx. The formulas for the separate letters are rewritten versions of the CVP equation. **Sx** is total revenue, because it is the selling price multiplied with the units sold. **Vx** is the total variable costs, because it is variable costs per unit multiplied with units sold. The **contribution margin** (**CM**) is selling price -- variable costs per unit and gives the amount that can be contributed to fixed costs and profit. The **contribution margin ratio** (**CMR**) is calculated with CM/selling price to calculate what part of the selling price can contribute to fixed costs and profit. The **margin of safety** is the amount of units sold above the units sold at break-even. This is calculated with total units sold -- units sold before break-even. The **sensitivity analysis** measures the sensitivity of the CVP model when variables change. **Managerial Accounting 5** **Operating leverage** is the amount of fixed costs compared to the variable costs a company has. **Highly levered** means a lot of fixed costs compared to the variable cost. **Low operating leverage** is the opposite with higher variable costs. The **benefits** of high leverage are that after break-even, the profit is immediately substantial. With low leverage, there is less profit after break-even, but that also means smaller losses if break-even is not reached. Therefore, high leverage has higher risks and higher rewards. A **higher CMR** means that a company is highly levered, because a high CMR means that the variable costs are low. Leverage can be **decreased** by making fixed costs variable. **Revenue management** means changing prices based on who the customer is and when the sale is made. For example, ski resorts are more expensive during Christmas, because there is more demand. **Managerial Accounting 6** A **budget** is a business plan expressed in monetary terms to forecast the future. A **non-monetary budget** can be a budget for volume, for example, expected number of customers. A budget is used as a guideline and method of comparison for the actual results. The **purposes of a budget** are to provide organized estimates of the future, to provide long-term and short-term goals for management to plan activity and to provide information needed for control. A **long-term budget**, or **strategic budget**, is for 1-5 years and plans for major changes in an organization. A **short-term budget** is for less than a year and can be weekly, monthly, quarterly or yearly. This budget shows more day-to-day expectations to compare immediately. A **fixed budget** is based on a specific level of activity and only provides budgeted revenue and expenses for this level of activity. If sales differ it can be difficult to use this budget, because it is no longer accurate. A **flexible** or **variable budget** is based on several levels of activity and is therefore easier to adjust to the actual results. A **capital budget** is a plan for the acquisition or replacement of fixed assets. This allows a company to prepare enough money to buy or replace assets without a high loan. An **operating budget** is an ongoing projection of sales and expenses on an income statement. A **department budget** is a budget per operated department with estimated sales and expenses. Other departments have budgets that only contain estimated expenses. This budget is often made annually and broken down per month. A **master budget** is made every year with a balance sheet, departmental expenses and sales for a year. The **preparation of a budget** is done per department with the department manager and **budget committee**. The **formal preparation** is done by accounting, checked by a controller and approved by the general manager. **Long term budgets** are prepared every year for the next 5 years, the part that is already budgeted in a previous year is revised. **Short term budgets** are annual with monthly revision. **Advantages of budgeting**: Budgeting encourages **communication** between departments. Budgeting requires consideration of **alternative courses of action**. Budgets predetermines a **standard for comparison** and makes evaluation possible. Flexible budgets can prepare for **adjustments** to the right level of sales. Budgeting forces **forward-looking** and **anticipation**. Budgeting requires **internal and external factors** to be considered. **Disadvantages of budgeting**: Budgeting requires **time and cost**. Budgets are based on **unknown factors**, however, that can make a company prepared for the unknown. Budgeting may require sharing **confidential information**. Budgets may lead to "**spending to the budget**" to avoid budget cuts in the future. **The budget cycle**: 1\. Establish attainable goals/objectives 2\. Plan to achieve those goals 3\. Compare the actual results to the plans and analyse the differences 4\. Take the required corrective action 5\. Improve the effectiveness of budgeting **Budgeted income statements**: 1\. Estimate sales per department 2\. Deduct estimated direct operating expenses 3\. Combine estimated departmental operating incomes and deduct undistributed expenses 4\. Achieve an estimated net income Budgets for a **new operation** are difficult, because there is no historical information to fall back on. The budget has to be based on known facts and **industry averages**. **Estimated room sales** is calculated with estimated occupancy rate x ADR x rooms available x days open. **Estimated food sales** could be calculated with average annual sales per seat x available seats or average check x estimated amount of covers. **Managerial Accounting 7** **Relevant reporting** is timely, useful and has sufficient detail without an information overload. **The budgetary control process**: 1\. **Determination of variances** is comparing the budget to actual results on a monthly basis and the year-to-date variances are the sum of monthly variances. 2\. **Determination of significant variances** is determining **significance criteria** and establishing which variances are significant in both percentages and absolute value. 3\. **Variance analysis** gives management information to identify causes of variances. **Significance criteria** are determined by a company and consist of **percentages** and **absolute values**. If a variance is significant in both the percentage and absolute value, it is a significant variance and should be analysed. The criteria are different for revenue, fixed costs and variable costs. Fixed and variable costs have different criteria, because fixed costs are more difficult to control and should therefore be held to stricter standards. **Revenue variances** are price variances (PV) and volume variances (VV). **Price variances** are calculated with budgeted volume x (actual price -- budgeted price) and show the revenue that was missed/added due to changes in price. **Volume variances** are calculated with budgeted price x (actual volume -- budgeted volume) and show the revenue that was missed/added due to changes in units sold. **Price-volume variances** (**PVV**) are calculated with (actual price -- budgeted price) x (actual volume -- budgeted volume). **Ethics** are choices of proper conduct and doing what is considered 'right'. There are five questions to answer in order to find out whether something is ethical: Is it legal? Does it hurt someone? Is it honest? Would I care if it happened to me? Would it matter if this was publicized? **Food and Beverage Cost Accounting 1** **Foodservice management** is more complicated than management for other departments or other industries, because the F&B manager is in charge of product sale, menu development, guest service and inventory management. The **tasks of a F&B manager** are securing raw materials, manufacturing products, distributing to end users, market to end users and reconcile problems with end users. **Control points** are basic operating activities that must be performed to be able to open a restaurant. The control points are: menu planning, purchasing, receiving, storing, issuing, preparing, cooking, holding, serving, service and guest satisfaction. Preparing, cooking and holding are **production activities**. Control points are also called **product control procedures**. **Menu planning** is an ongoing process of developing, testing and advertising dishes. **Merchandising** is promoting the sale of goods and part of the F&B management tasks. The **guest check average** is the average amount spent per person. **Cost control procedures** make sure that there are not too many costs, while still providing meals. **Production requirements** are the food items required by the menu and they must be consistently produced. **Nutritional content** of meals has an impact of the health of guests and should be considered during menu planning. **Food safety management** includes identifying potential hazards and reducing the risk. Food is **perishable**, meaning it goes bad if it is not eaten in time, and should be managed and kept in the right conditions. **Equipment needs** mean that equipment should be available and the menu should be balanced to avoid underutilization or overloads for equipment. **Lay-out and space requirements** mean that there should be adequate staff facilities, production space, service space and storing space. **Staffing needs** are the amount of staff needed for production and service. **Service requirements** are a plan for serving with the required skill per employee, adequate equipment, adequate inventory and adequate facilities. **Convenience food** is food that is purchased fully produced and does not need labour on site. This is usually more expensive, but saves time and labour costs. **Revenue control procedures** are in place to make sure guests pay before they leave. **Menu planning** involves marketing, considering target groups, meeting and exceeding expectations, benchmarking, costs, availability, production issues and special offers. **Ambience** is important for menus and consists of theme and atmosphere. **Theme** means that the decorations are compatible with the menu and atmosphere. **Menu rationalization** means simplifying operation to be more efficient. **Cross-utilization** means using 1 product or sub-recipe in multiple dishes, which limits the number of raw ingredients needed. **Menu factors** are storage conditions, employee skills, product availability/seasonality, price-quality, safety and cost-effectiveness. **Guest preferences** include feedback, guest conversations and historic sales. **Standards** are levels of expected performance compared to actual operating results. Setting **detailed standards** increases the usefulness. **Standard cost tools** are standard recipes, standard purchase specifications, standard yields, standard portion sizes and standard portion costs. **Standard recipes** are formulas for producing food, including a summary of ingredients and their required quantity, preparation procedures and portion sizes. Standard recipes are consistent, because it looks, tastes and costs the same each time. This also ensures that enough portions can be prepared. A standard recipe also allows for scheduling employees effectively and allow for less supervision. It is also possible to swap employees (for example, in case of illness), because there is a recipe to follow. A **sub-recipe** is a recipe that yields an ingredient for a different recipe. **Disadvantages of standard recipes** are the lack of creativity, extra time required for testing, time for training employees and the fact that it is so simplified that employees might fear they can become redundant. **Standard purchase specifications** are descriptions of quality, size, weight and count of items that have to be ordered. This is time consuming, but reduces costs because the quality is specified (not very high in quality needed = cheaper) and there are more suppliers to choose from. **Purchasing costs** include delivery costs and purchase staff salaries. A **disadvantage of standard purchase** specifications is that it is time consuming to make for each ingredient. Therefore, this is usually only used in bigger businesses. **Standard yield** is the net weight/volume of a food item after the recipe process. This is used to compare to the actual yield when a recipe is made after testing. A **yield test** determines the standard yield. For meat, this is called a **butcher test**. The **AP price/volume** is the as-purchases price/volume. the **EP price/volume** is the edible portion price/volume. **Production loss** is the difference between the AP and EP weight. Production loss happens during the preparation, cooking and portioning, because parts are thrown away (seeds, stalks, bones) and water evaporates when something is cooked/baked. The **yield percentage**, or **yield factor**, is calculated with servable weight/original weight to calculate what percentage of the weight is left to be served after production loss. The **cost per servable pound** is calculated with AP price/yield percentage. The **quantity to purchase** is quantity needed x (edible portion/yield percentage). The **standard portion size** is indicated in the standard recipe and makes the portions consistent. Varying portions can disappoint guests and make portion costs difficult to calculate. **Value** is the relationship between price, portion and quality. **Portion control tools** are tools like scales, scoops and glasses. The **standard portion cost** is the cost of preparing and serving one portion. **Precosting** is establishing standard portion cost. **Portion cost** is calculated with total ingredient cost/amount of portions yielded. **Food and Beverage Cost Accounting 2** **Venue food revenue** is food sold in specific dining areas, such as a restaurant, bar or café. **In-room dining food revenue** is food sold and delivered to guest rooms as room service. **Banquet/conference/catering food revenue** is food sold as banquets for events. **Mini-bar food revenue** is packaged food sold in the rooms. **Other food revenue** is food sold, but not designated to other food revenue classifications. **Beverage sales** could also be classified in the same categories: **venue beverage revenue**, **in-room beverage revenue**, **banquet/conference/catering beverage revenue**, **mini-bar beverage revenue** and **other beverage revenue**. **Cost of food sales**, or **net food cost**, includes beverages transferred from the beverage department and excludes food transferred to the beverage department. **Beverage sales** includes all alcoholic drinks. The **cost of food sales percentage** is cost of food sales/total food revenue. **Monthly cost of food used** is beginning inventory + purchases -- ending inventory and includes food used for, for example, employee meals. It does not includes transfers yet. **Cost of food used** could also be called **unadjusted cost of food sales** and is not a separate account. The **adjustments** that should be made include transfers from/to beverage department (often called transfers from/to bar/kitchen), employee meals and complimentary meals. **Food available** is beginning inventory + purchases and a subtotal before subtracting ending inventory. **Transfers to kitchen**, or **transfers from bar**, are, for example, wine used for cooking and liqueurs used for flaming desserts. They belong to cost of food sales, not beverage. **Transfers from kitchen**, **transfers to bar**, are, for example, fruit for drink garnish, ice cream for drinks and food served during cocktail hours. This is a part of cost of beverage sales. **Transfer memos** are source documents for cost of transfers. Large hotels have support centres that deliver to the revenue centres. **Invoices** are separated for food and beverage, even if it comes from one supplier. The invoices are used to make the **purchase journal**. **Consistency** is needed for the method of inventory calculation, value of open food and open cases in storage. **Inventory counting procedures** include assigning inventory values and developing policies and procedures. **Employee meals** are expenses calculated with fixed cost amount per meal x number of employee meals made. **Complimentary food and beverage** is an expense for the marketing department, because the food/beverage is used to make clients happy and promote the hotel. Therefore, complimentary food is not cost of food sales and used as an adjustment. **Daily food control** means checking everything every day to find problems early on. **Food and Beverage Cost Accounting 3** **Cost procedures** are based on standard recipes and precosting with current costs (costs to produce recipe). The **ingredient mark-up pricing method** is a method for determining the selling price of a menu item. 1. Determine the ingredient cost of the standard recipe. 2. Determine the multiplier to mark-up. 3. Establish base selling price with ingredient cost x multiplier. The **multiplier** is calculated with 1/food cost percentage. For example, cost of sales should be 40%, therefore, 1/0,40 = 2,5. The ingredient cost should be multiplied by 2,5 for the base selling price. The **base selling price** is a starting point for determining the final price. Other factors can influence the price until it is set. The **contribution margin pricing method** is a different method for determining the selling price of a menu item. 1. Determine the **average CM per guest** with (non-food costs + required profit)/expected covers. 2. Add the average CM per guest to the precosted food cost. The **advantages of the CM pricing method** are that it is practical, serving costs are similar per item, reduces range of prices and uses a seat tax. A **seat tax** is the amount of money that should be spent when someone uses a seat to cover the costs. A **disadvantage of the CM pricing method** is that it is not fair when the menu items require very different prices. The **concept of value** is the guest's perception of price-quality-service, cleanliness and atmosphere. **Supply and demand** is whether guest will 'demand' a certain item for a certain price. If the **competition** is very similar, the prices should be similar. If a dish or an experience is unique, prices can differ more. Businesses with **high volume** can divide fixed costs over many guest, therefore lowering the CM per guest. Low prices give a higher volume, but lower CM per item. **Elasticity of demand** is how quantity demanded responds to changes in price. **Elasticity** is calculated with %change in quantity demanded/%change in price. if the answer is between -1 and 1, it is inelastic. If the answer is bigger than 1 or smaller than -1, it is elastic. **Elastic** means that a percentage price change creates larger percentage change in demand. **Inelastic** means that a percentage price change creates a smaller percentage change in demand. -0.5 **Food and Beverage Cost Accounting 4** **Menu engineering** is a popular approach to menu evaluation. The goal of menu engineering is to increase the CM to increase profit. A **good menu item** should be both popular and profitable. A **popular menu item** is ordered frequently. Popularity is measured with the menu mix percentage and the expected popularity. The **expected popularity**, or **fair share**, of an item is calculated with 100%/number of items on the menu. For example, if the menu has 5 items, the expected popularity of an item is 100%/5 = 20%. The **menu mix percentage** is calculated with number of a , menu item sold/total menu items sold. This is similar to the sales mix, but the sales mix measures in revenue and the menu mix measures in items sold. If the menu mix percentage of an item is at least 70% of the expected popularity, the item is considered popular. A **profitable menu** item has a high CM. An item is profitable if the CM per item is equal to or higher than the average CM per item. The **average CM per item** is calculated with total CM/number of items sold. A **star** is a menu item that is both popular and profitable. A **plowhorse** is an item that is popular, but not profitable. A **puzzle** is an item that is profitable but not popular. A **dog** is an item that is not profitable or popular. Managing **plowhorses** can be done in different ways. **Increasing prices** carefully could make the plowhorse more profitable, but this is mostly effective if the item is unique and not made by competitors. **Testing for demand** can be done with repackaging at repositioning on the menu to increase the price without guests noticing. **Relocating the item** to be less visible on the menu gives more attention to more profitable items. Combining with **lower cost products** like vegetables or dessert could make the dish cheaper without lowering the quality of the actual dish. Replacing sub-recipes with **convenience food** could make the dish cheaper due to lower labour costs. Managing **puzzles** can be done by shifting the demand to the item by **repositioning** on the menu, renaming, using **selling techniques**, **advertising**, using table tents and using menu boards. A **reduced price** might also increase demand, but it could also reduce guest value. Adding **value** can be done with bigger portions, expensive accompaniments/garnish and with higher quality. Managing **stars** can be done by maintaining **rigid specifications** to keep the quality the same, making it **highly visible** to make guests aware, testing for **selling price inelasticity** to perhaps increase the price even more and using **suggestive selling techniques**. Managing **dogs** can be done by simply **taking it off the menu** or **increasing the price** to try to make it a puzzle. **Managing the menu** can be done by asking opinions from staff and guest. The higher the CM is, the better. In a **multi-unit organization**, like a chain company, it can be difficult to manage the menu, because people expect consistency in prices, products and quality. The menu planning is done at a corporate level and does not take into considerations how separate locations are doing. **Formulas** **Average check** = total amount spent/amount of customers **Profit** = sales -- expenses **Accounting equation** = assets = liabilities + owners' equity **Retained earnings** = revenue -- expenses -- dividends declared **Depreciation** = (asset cost -- salvage value)/useful life **Book value assets** = cost -- accumulated depreciation **Gross profit** = revenue -- cost of sales **VAT payable** = output VAT -- input VAT **Return on Equity** (**RoE**) = net income/owners' equity **Profit Margin** (**PM**) = net income/revenue **Asset Turnover** (**AT**) = revenue/total assets **Asset-Equity ratio** (**AE**) = total assets/owners' equity **DuPont** = RoE = PM x AT x AE **Current ratio** = current assets/current liabilities **Debt ratio** = total liabilities/total assets **Average owners' equity** = (equity beginning of the year + equity end of the year)/2 **Common size balance sheet** = item on balance sheet/total assets **Net assets** = assets -- liabilities **Gross Operating Profit** (**GOP**) = departmental profit -- undistributed expenses **Net revenue** = revenue -- allowances **Cost of sales** (periodic) = beginning period inventory value + purchases (= **goods available**) -- ending period inventory value (= **cost of goods used**) -- goods used internally = **cost of goods sold** **Labour costs** = salaries + expenses salaries from non-revenue departments + benefits **Operating efficiency ratio** = GOP/total revenue **Paid occupancy percentage** = number of rooms sold/number of rooms available **Seat turnover** = number of guests served/number of seats available **Complimentary occupancy** = complimentary rooms/rooms available **Average occupancy per room** = number of guests/number of rooms occupied **Multiple occupancy** = rooms occupied by 2+ guests/rooms occupied **Sales mix** = departmental revenue/total revenue **Average Daily Rate** (**ADR/ARR**) = room revenue/rooms sold **Revenue Per Available Room** (**REVPAR**) = room revenue/rooms available **or** paid occupancy percentage x ADR **Gross Operating Profit per Available Room** (**GOPAR**) = GOP/rooms available **Food cost percentage** = cost of food sales/food sales **Labour cost percentage** = total labour costs/total revenue **Fixed costs per unit sold** = total fixed costs/units sold **Total Variable Costs** (**TVC**) = variable cost per unit x units sold **Total Mixed Costs** (**TMC**) = fixed part of the cost + (variable part of the cost per unit x units sold) **Total Costs** (**TC**) = TFC + TVC **or** (fixed costs + fixed part of mixed costs) + ((variable cost per unit + variable part of mixed cost per unit) x units sold) **Cost-Volume-Profit** (**CVP**) **equation** = sx -- vx -- F = In **Selling price** = s = ((F + In)/x) + v **Units sold** = x = (F + In)/(s -- v) **Variable costs per unit** = v = s -- ((F + In)/x) **Fixed costs** = F = sx -- vx **Contribution Margin** (**CM**) = selling price -- variable costs per unit **Contribution Margin Ratio** (**CMR**) = CM/selling price **Margin of safety** = total units sold -- units sold for break-even **Estimated room sales** = estimated occupancy rate x ADR x rooms available x days open **Estimated food sales** = average annual sales per seat x available seats **or** average check x estimated amount of covers **Price variances** = budgeted volume x (actual price -- budgeted price) **Volume variances** = budgeted price x (actual volume -- budgeted volume) **Price-Volume Variances** (**PVV**) = (actual price -- budgeted price) x (actual volume -- budgeted volume) **Yield percentage** = servable weight/original weight **Cost per servable pound** = AP price/yield percentage **Quantity to purchase** = quantity needed x (edible portion/yield percentage) **Portion cost** = total ingredient cost/amount of portions yielded **Cost of food sales percentage** = cost of food sales/total food revenue **Monthly cost of food used** = beginning inventory + purchases -- ending inventory **Food available** = beginning inventory + purchases **Employee meals** = fixed cost amount per meal x number of employee meals made **Ingredient mark-up price** = ingredient cost x multiplier **Multiplier** = 1/food cost percentage **Average CM per guest** = (non-food costs + required profit)/expected covers **Contribution margin price** = ingredient cost + average CM per guest **Elasticity of demand** = %change in quantity demanded/%change in price **Expected popularity** = 100%/number of items on the menu **Average CM per item** = total CM/number of items sold **Tips**: Don't forget to take the average of equity, liabilities assets over the year for ratios. Don't forget to write down the entire formula before adding the numbers and calculating. If the question says "show calculations", there will be partial grading. When calculating, describe the steps and what you calculated as a side step. When answering theory questions, don't forget to repeat the question in the answer. Show differences in both absolute and relative value. Check for spelling mistakes, especially if the mistake changes the meaning of a word.